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Junior Miner Financing: A Tough Year Ahead?

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Lackluster equity market performance may mean a reduction in exploration spending in 2012.

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The world's junior mining companies may be facing a difficult market when it comes to increasing their exploration spending, analysts say, but tough times could also mean interesting opportunities for the overall industry.

In its World Exploration Trends 2012 report released earlier this month, Metals Economics Group notes that a weakening in the pace of exploration financing at the end of 2011 means many junior mining companies have had difficulty raising the funds they need to sustain or increase their exploration spending this year.

Most of the money juniors spend on exploration is typically raised between the fourth quarter of the previous year and the middle of the current year, MEG notes.

"Although early indications are that some juniors plan to increase their exploration budgets in 2012, unless equity markets improve over the first quarter, many will likely be forced to reduce exploration spending this year," according to the report.

While junior miners have accounted for nearly half of annual exploration spending in recent years, raising $7.4 billion for precious and base metal exploration in the fourth quarter of 2010 and the first half of 2011, MEG says struggling equity markets in the second half of 2011 pushed the pace of exploration financings back to the levels seen in late 2009 and early 2010.

According to Bloomberg data, mining companies have raised $1.43 billion from initial and secondary offerings and preferred share sales in Canada so far in 2012 (to March 8), down 25% from the same period in 2011.

In the first two months of 2012, the TMX Group reports that total financings raised by TSX Venture Exchange-listed companies were down more than 54% compared with the first two months of 2011. According to PricewaterhouseCoopers, mining companies make up 57% of the market capitalization of the Global X S&P TSX Venture 30 Canada (TSXV).

Kerry Smith, a Toronto-based mining research analyst with Haywood Securities, says it is a very tough market for juniors overall, with financing windows open briefly and infrequently:
Some juniors are turning to alternative sources of funding – like selling a royalty stream – but this is typically financing available to either producers or companies just trying to finalize production financing. Royalty companies are not very interested in financing exploration. The only exploration projects getting financed are those with decent drill results where resource growth is being demonstrated.

At the same time, most major and intermediate producers remain committed to exploration to both replace mined reserves and grow their pipelines, especially while metals prices stay relatively strong.

"If equity markets do not improve relatively early in 2012, majors and intermediates looking to finance or joint-venture with cash-strapped junior explorers are likely to negotiate far more favorable terms than they would have in 2011," the MEG report says.

An environment with strong commodity prices, "resource-hungry" miners with strong balance sheets, and a shortage of available risk capital can create interesting opportunities for the exploration industry, MEG says. Namely, juniors with promising projects but insufficient access to equity funding in the short term may be more open to financing, joint venture, or acquisition discussions with larger mining companies, or consolidation with better financed peers.

In a recent report on mergers, acquisitions, and capital-raising trends in the sector, Ernst & Young notes that because cash and the corporate debt market were the primary sources of funding for majors such as Xstrata (XTA.L), Rio Tinto (RIO), and Glencore (GLEN.L) in 2011, junior and midtier miners took up a greater share of secondary equity funds during 2011-- a trend that it expects to see continue into 2012.

"If market conditions fail to improve, we expect that the disparity between equity market valuations and commodity fundamentals will create buying opportunities for financially-strong juniors looking to consolidate, and for strategic investors and majors looking to increase their control of resources or consolidate positions in new markets," the report says.

Overall, MEG says it is expecting a decline in junior explorer spending in 2012, offset by increased spending by metals producers, resulting in a net increase of 5% to 15% in exploration spending for the industry in 2012.
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